Speaking to SMSF Adviser, View Legal founder Matthew Burgess said while he believes the proposal to increase the SMSF member limit from four to six is positive in some respects, there is huge complexity hanging over this change when it’s looked at through the lens of binding nominations and estate planning.
“There are enough war stories just with two, three or four members. To then take that to five or six members, to me it potentially makes things significantly riper for problems. Every extra member you add is an extra complication when you come to the exit arrangements for the fund,” said Mr Burgess.
“Even just with the day-to-day control, there is going to be the need for the industry to think about how director voting happens, and what the shareholding of the corporate trustee needs to look like. Four is relatively simple to manage but suddenly when you go to six it adds a whole new layer of complexity there.”
At the moment, even if there are two kids and two parents in the fund, the worst case scenario is that the fund will end up with a stalemate, he explained.
“Now if you bring in three kids or even four kids you’ve got a situation where if you’re counting hands, the parents can be outvoted automatically,” he said.
SMSFs might decide to address that, he said, by pinning or stapling member balances to voting rights.
“Therefore, even though mum and dad might be the minority in terms of the number of heads you count, they would still maintain a majority because in theory they’d have the higher member balances. [However], this is not off-the-shelf stuff. You have to have gone and amended your constitution and hardwired that in under the terms of the SMSF,” he said.
“While the SMSF may have sorted it out on that [operational] level, someone might then lose capacity or die and you’ve then hardwired in all those voting requirements that are happening while someone is alive, which then present their own consequences once a person passes away.”
Mr Burgess said this may be further complicated by the fact that SMSFs would want to expand the number of members in their fund in order to invest in larger, illiquid assets, which would further intensify the issues arising with death.
Never have the kids in an SMSF in the first place
The proposal runs the risk that greater prescription will come in regard to the Trustee of SMSF. SIS has onerous trustee requirements for APRA Funds and, the uncommerciality of requiring 6 directors of a trustee company, may be realised, and a legislative response embedded. Be careful what you wish for.